Corporation Law: Pennsylvania F. Traynor Beck, Peter Asselin and Philip D. Amoa, McCarter & English, LLP with PLC Corporate & Securities

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1 Corporation Law: Pennsylvania F. Traynor Beck, Peter Asselin and Philip D. Amoa, McCarter & English, LLP with PLC Corporate & Securities This Article is published by Practical Law Company on its PLC Corporate & Securities web service at A Q&A guide to corporation law in Pennsylvania. This Q&A addresses key areas of corporate law such as formation, foreign qualification, mergers, anti-takeover laws and dissolution. FORMING A CORPORATION AND CORPORATE FORMALITIES 1. What is required to form and organize a corporation in your jurisdiction? Please include information on: Documents. Corporate actions (board vs. incorporator actions). Name requirements and reservation options. Filing requirements (including what needs to be filed and where, timing, electronic vs. paper and availability of expedited/rush services). DOCUMENTS Articles of Incorporation The incorporator must file articles of incorporation with the Pennsylvania Department of State s Corporation Bureau (Pennsylvania Corporation Bureau). All entities filing with the Pennsylvania Corporation Bureau must have a Pennsylvania address. A post office box is unacceptable. The articles of incorporation must include: A statement that the corporation is incorporated under the Business Corporation Law of 1988 (BCL). The name of the corporation. The name and address of the incorporator or incorporators. The name and address of the registered agent and the address of the registered office in Pennsylvania. A statement that the corporation will be organized: on a nonstock basis; or on a stock share basis. (15 Pa. Cons. Stat. 1306(a) (2012).) A statement of duration is only needed if the corporation s existence is not perpetual (15 Pa. Const. Stat. 1306(a)(6) (2012)). If a corporation s articles of incorporation does not state the corporation s purpose, the presumed purpose is to engage in all lawful activity, after first obtaining necessary state agency approval. By-laws In Pennsylvania, a corporation need not adopt by-laws at the time of its formation, but by-laws are sometimes adopted by the incorporator or board of directors at formation or a later time. By-laws are only used as regulations among the shareholders, directors and officers of the corporation and do not affect contracts or other dealings with other persons unless those persons have actual knowledge of the By-laws (15 Pa. Const. Stat. 1505). If they conflict with the articles of incorporation, the articles of incorporation control because by-laws are an internal document not filed with the Pennsylvania Corporation Bureau. Therefore they are not binding on third parties who are not shareholders of the corporation. Typical areas covered in the by-laws include: Procedures for meetings of shareholders and directors (including record date, notice and voting). Learn more about Practical Law Company practicallaw.com Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.

2 Corporation Law: Pennsylvania Procedures for the election and removal of directors and officers of the corporation. Issuance and transfer of shares of the corporation. By-laws may be adopted, amended or repealed by: The incorporators. The initial directors (if named in the articles of incorporation). The board of directors (if the corporation has not received payment for any of its stock). After a corporation receives payment for any of its stock, its shareholders gain the power to adopt, amend and repeal the by-laws. A corporation can also grant its directors the power to adopt, amend and repeal the by-laws by including an express authorization in the articles of incorporation. CORPORATE ACTIONS The Pennsylvania Corporation Bureau s acceptance of the articles of incorporation for filing is proof of valid formation of the corporation. At this point, there is a corporation by law. After incorporation, the incorporator (if the articles of incorporation did not name initial directors) holds an organizational meeting to appoint directors, elect officers and conduct other business (15 Pa. Cons. Stat. 1310(a) (2012)). NAME REQUIREMENTS AND RESERVATION OPTIONS Naming a Pennsylvania Corporation Pennsylvania corporation names must include one of the following words or their abbreviations, or equivalent words or their abbreviations in another language: Corporation. Company. Incorporated. Limited. Association. Fund. Syndicate. (15 Pa. Cons. Stat (2012).) Any corporation organized under the BCL may not express or imply that the corporation is: A governmental agency. A bank, bank and trust company, savings bank, private bank or trust company. An insurance company, unless it is duly licensed as an insurance company or the Pennsylvania Insurance Department certifies that it does not object to the corporation s use of this designation. An electric or gas public utility corporation, unless it has an express corporate purpose of being so (subject to the jurisdiction of the Pennsylvania Public Utility Commission or the Federal Energy Regulatory Commission). A credit union. (15 Pa. Cons. Stat (2012).) Name availability may be verified by: Calling the Pennsylvania Corporation Bureau at (717) Visiting the Bureau s online search. Submitting a written request, with a list of up to three names, along with a $15 search fee. Name Reservations Corporations can reserve names for 120 days by submitting a written request to the Pennsylvania Corporation Bureau. The fee for reserving a name is $70. Name reservations can be renewed for an additional 120 days for $70 based on availability. Reservation requests should be sent by letter because there are no preprinted forms. The address is Department of State Bureau of Corporations and Charitable Organizations, 401 North Street Room 206, Harrisburg, PA The proposed name of the corporation must be distinguishable from the names: Of existing corporations. Already reserved. The Pennsylvania Corporation Bureau may accept names that are not distinguishable from the name of an existing corporation or a name already reserved if the existing corporation consents. FILING REQUIREMENTS The articles of incorporation are filed with the Pennsylvania Corporation Bureau. Many law firms and companies use a service company to file the articles of incorporation for a fee. The articles of incorporation typically can be submitted to the service company electronically. If a service company is not used, the articles of incorporation can be filed by mail or fax, as detailed on the Pennsylvania Corporation Bureau s website. Corporations must comply with the following guidelines for the Pennsylvania Corporation Bureau to properly and efficiently process the corporation s documents: Documents must be submitted on Pennsylvania Corporation Bureau forms or on 8 1/2 x 11 paper. Documents should be typed or printed in black or blue ink and be legible. Legible fax copies or copies of documents are acceptable. Pennsylvania Corporation Bureau forms do not require notarization. All entities filing with the Pennsylvania Corporation Bureau must have a Pennsylvania address, except for fictitious names and trademarks. A post office box alone unacceptable. The fee for filing articles of incorporation is $125, and for expedited filing services an additional $70. Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 2

3 After receiving the articles of incorporation and related fees, the Pennsylvania Corporation Bureau: Stamps the articles of incorporation with a filing number and the date and time of filing. Appends a certificate from the Pennsylvania Secretary of State approving the articles of incorporation. Publication of the intent to file or the actual filing of articles of incorporation must be made in two newspapers of general circulation, including a legal journal if possible (15 Pa. Cons. Stat (2012)). The Pennsylvania Corporation Bureau does not require proof of the advertising, but it should be filed with the corporation s minutes. The advertisements must contain the name of the proposed corporation and a statement that the corporation is to be, or has been, organized under the provisions of the BCL. 2. What corporate formalities are required annually? In particular, what are the: Annual filing requirements (including franchise tax amounts)? Requirements for holding an annual meeting of the shareholders (including the requirements for calling a meeting)? ANNUAL REPORT AND FRANCHISE TAXES Pennsylvania does not require corporations to file an annual report. Domestic and foreign corporations (see Foreign Corporations) doing business in Pennsylvania are subject to corporate net income tax and corporate loans tax. In addition, Pennsylvania corporations must pay capital stock tax, and foreign corporations must remit foreign franchise tax. The capital stock tax is anticipated to be completely eliminated by ANNUAL MEETING OF SHAREHOLDERS Shareholders elect directors annually at either an annual meeting or by unanimous written consent in lieu of a meeting. The annual shareholders meeting must be held to elect directors on the date and time or in the manner described in the by-laws. If the annual meeting is not held or action by written consent is not taken within six months after the date designated for the annual meeting, any shareholder may call the annual meeting at any time. Failure to hold the annual meeting at the designated time does not trigger a dissolution of the corporation or affect valid corporate acts (15 Pa. Cons. Stat. 1755(a) (2012). FOREIGN CORPORATIONS 3. When and how does a corporation qualify to do business in your jurisdiction? Please include information on: State nexus analysis. Filing requirements. Fees. Name requirements. STATE NEXUS ANALYSIS Any corporation organized under a jurisdiction other than Pennsylvania and doing business in Pennsylvania must qualify to do business as a foreign business corporation. The Business Corporation Law of 1988 (BCL) does not define doing business. However, Pennsylvania does not consider the following acts as doing business : Maintaining or defending any action or administrative or arbitration proceeding, or settling claims or disputes. Holding meetings of directors or shareholders, or carrying on other internal affairs. Maintaining bank accounts. Maintaining offices or agencies for the transfer, exchange and registration of its securities. Appointing and maintaining trustees or depositaries for its securities. Effecting sales through independent contractors. Maintaining offices for soliciting or procuring orders, if the orders require acceptance outside of Pennsylvania before becoming binding contracts. Creating or acquiring obligations, mortgages or other security interests in real or personal property. Securing or collecting debts or enforcing any rights in property securing them. Doing any business in interstate or foreign commerce. Conducting an isolated transaction completed within 30 days and not as a part of repeated transactions of a similar nature. Inspecting, appraising and acquiring real estate and mortgages (including any liens, personal property and security interests) and holding, leasing, conveying and transferring them. (15 Pa. Cons. Stat (2012).) Before doing business in Pennsylvania, foreign business corporations must obtain a certificate of authority from the Pennsylvania Department of State (15 Pa. Cons. Stat. 4121(a) (2012)). 3 Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.

4 Corporation Law: Pennsylvania FILING REQUIREMENTS Registration Documents To qualify to do business in Pennsylvania, a foreign business corporation must file an application for a certificate of authority with the Pennsylvania Department of State, setting out: The name of the corporation (the name must be available). The jurisdiction it is incorporated under. The address, if any, of its principal office under its jurisdiction of incorporation. Subject to Section 109 of the BCL (relating to name of commercial registered office provider in lieu of registered address), the address, including street and number, if any, of its proposed registered office in Pennsylvania. A statement that it is incorporated for a purpose involving profit, incidental or otherwise. (15 Pa. Cons. Stat (2012).) A foreign business corporation must officially publish notice of its intention to apply its application for a certificate of authority. The notice may appear before or after the day on which the application is made to the Pennsylvania Department of State (15 Pa. Cons. Stat. 4124(b) (2012)). Annual Reports Pennsylvania does not require foreign business corporations to file an annual report. FEES There is $250 fee for filing of an application for a certificate of authority. Expedited filing services are available for an additional $70. NAME REQUIREMENTS The name of a foreign corporation must be different from either: The name of any existing corporation. A fictitious name of any other authorized foreign corporation. If there is an existing Pennsylvania corporation with a similar name, a foreign corporation can register its name with the existing corporation s consent. If the existing corporation will not consent, the foreign corporation may be admitted, if it files both: A fictitious name application (with a $70 fee) that sets out an assumed fictitious name. An application for a certificate of authority, showing both its true name and assumed fictitious name. Foreign name registrations are registered or reserved for a oneyear period for $70. This filing may be renewed annually between October 1 and December 31 for the following calendar year. This reserves the name but does not qualify the foreign entity. (15 Pa. Cons. Stat. 4131(b) (2012).) FIDUCIARY DUTIES 4. Please summarize the fiduciary duties of directors and officers in your jurisdiction. DIRECTORS AND OFFICERS Directors and officers of Pennsylvania corporations owe fiduciary duties to the corporation and its shareholders. Directors or officers may be held personally liable for breaching their duties to the corporation. The primary duties are: Duty of care. Duty of loyalty. Duty of Care In fulfilling her responsibilities as a member of the corporation s board of directors, a director must discharge her duties: In good faith. With the degree of care that an ordinarily prudent person in a like position would use under similar circumstances. The fiduciary duty of care obligates directors to act on an informed and reasonably diligent basis when considering material information. A director is not required to consider the interest of any particular group (such as employees or management) as controlling. Pennsylvania courts review the directors exercise of these duties under the business judgment rule. The courts recognize that directors must sometimes take business risks to promote the best interests of: The corporation. The shareholders. The business judgment rule was developed under case law and provides that courts will not interfere with the decisions and actions of directors in managing the corporation s affairs, if those decisions and actions are made: In good faith. On an informed basis. The corporation s by-laws can eliminate directors personal liability to the corporation or its shareholders for breaches of their duty of care. However, a corporation may not limit directors liability where the director breaches or fails to perform her duties and there is: Self-dealing. Willful misconduct. Recklessness. (15 Pa. Cons. Stat. 513 (2012).) Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 4

5 Duty of Loyalty The fiduciary duty of loyalty requires directors to act: In good faith. For the benefit of: the corporation; and shareholders. Decisions and transactions that involve a conflict between the interests of the corporation and the private interests of the director are not protected by the business judgment rule. Examples include: Interested director transactions. Transactions between the corporation and one of its directors. Competing ventures. When a director is involved with the corporation s competitor. Usurping corporate opportunity. When an opportunity that is necessary to the corporation (in its line of business or in which it has an interest or expectancy) is taken from the corporation for the benefit of one of its directors. Self-dealing. When a director takes action that injures the corporation. However, a transaction involving a conflict of interest is not voidable if either: The transaction was fair to the corporation when entered. Material facts and the director s interest were known and the deal was approved by a majority of either: the disinterested directors; or shares in good faith. MERGERS 5. What is required to complete a merger in your jurisdiction? Please include information on: Documents. Board actions. Filing requirements (including timing, electronic vs. paper and availability of expedited/rush services). Shareholder actions. Availability of appraisal rights (including requirements to exercise such rights). DOCUMENTS To complete a merger, the participating corporation must enter into a merger agreement. Also known as a plan of merger or consolidation, the merger agreement is the main transaction document in a merger. A Pennsylvania corporation may merge with another corporation or other entity whether or not it was organized in Pennsylvania. The corporation must file articles of merger with the Pennsylvania Secretary of State to effect the merger. A plan of merger or consolidation must set out: The terms and conditions of the merger or consolidation. If the surviving or new corporation is or will be a domestic business corporation, any desired changes in the articles of incorporation, including a restatement of the articles in the case of a merger, or in a consolidation, all of the statements required to be set out in restated articles. The manner and basis of converting the shares of each corporation into: shares or other securities or obligations of the surviving or new corporation; shares or other securities or obligations of any other person; or cash, property or rights that the holders of the shares will receive in the merger. Any provisions providing special treatment of shares held by any shareholder or group of shareholders under Section 1906 of the Business Corporation Law of 1988 (BCL). Any other desired provisions. (15 Pa. Cons. Stat (2012).) Articles of Merger After the adoption of the plan of merger or consolidation, each corporation must execute articles of merger or consolidation that set out: The name and location of the registered office of the domestic surviving or new corporation. The name and address of the registered office of each domestic and qualified foreign business corporation that is a party to the merger or consolidation. If the plan is to be effective on a specified date, the hour, if any, and the month, day and year of the effective date. The manner in which the plan of merger of consolidation was adopted by each domestic corporation, and if one or more foreign corporations are parties to the merger or consolidation, a statement that the plan was either authorized, approved or adopted by each of the foreign corporations in accordance with the laws of the jurisdiction in which it is incorporated. (15 Pa. Cons. Stat (2012).) BOARD ACTIONS The board of directors of each constituent corporation in a merger must adopt a resolution that approves the merger agreement and declares the merger advisable. The corporations must give the shareholders notice of the proposed merger, and shareholders must approve the agreement by casting a majority of shares in favor of the merger. Pennsylvania law does not require shareholder approval to merge a subsidiary that is 80% or more owned into a parent corporation (15 Pa. Cons. Stat. 1924(b) (2012)). 5 Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.

6 Corporation Law: Pennsylvania FILING REQUIREMENTS The surviving corporation must file the articles of merger with the Pennsylvania Department of State Corporation Bureau. The articles of merger can be filed before the effective date of the merger (as long as the articles state the effective date). A merger or consolidation may be terminated under the plan s provisions before it becomes effective. If the corporation has filed articles of merger or consolidation in the Department of State before the termination, it must also file a statement of termination (15 Pa. Cons. Stat. 1924(c) (2012)). The base fee for filing articles of merger is $150. There are additional fees of: $40 for each association that is a party to a merger or consolidation. $125 for each new association resulting from a division. $70 for expedited filing services. SHAREHOLDER ACTIONS In Pennsylvania, any fundamental corporate change requires: Board action. Notice to shareholders. Approval by a majority of the shares actually cast on the issue. Generally, the Pennsylvania Corporation Bureau must also be notified. APPRAISAL RIGHTS The BCL generally provides appraisal rights to dissenting shareholders who wish to request an appraisal of the value of their shares (15 Pa. Cons. Stat and 1578 (2012)). In a short-form merger, appraisal rights exist only for the subsidiary corporation s dissenting shareholders. ASSET SALES 6. What is required for an asset sale in your jurisdiction? Please include any distinctions for a sale of substantially all of the assets. In particular, please include information on: Documents. Board actions. Shareholder actions. Bulk sales compliance. Successor liability or de facto merger analysis. DOCUMENTS Although the Business Corporation Law of 1988 (BCL) does not require any filings to effect an asset sale, generally a corporation enters into an asset purchase agreement with the buyer. The agreement sets out: What is being sold. Details of the sale process. Liabilities and obligations of the parties. BOARD ACTIONS A corporation may in the regular course of business sell, lease, exchange or dispose of all or substantially all of its property on the terms and conditions and for the consideration determined by the board of directors (15 Pa. Cons. Stat. 1932(a) (2012)). If a corporation wishes to sell all or substantially all of its property or assets, other than in the regular course of business, the board of directors must approve the sale and propose the sale to the corporation s shareholders for approval (15 Pa. Cons. Stat. 1932(a) (2012)). SHAREHOLDER ACTIONS Unless the articles of incorporation provide otherwise, a sale of all or substantially all the assets of a corporation, other than in the regular course of business, requires the shareholders approval by a majority of votes actually cast on the issue. In Pennsylvania, the transfer of all or substantially all of the assets not in the ordinary course of business is a fundamental corporate change for the transferring corporation only. It is not a transfer of substantially all assets if the seller retains at least 25% of both: Its assets. Revenues from continuing operations. (15 Pa. Cons. Stat. 1932(g) (2012).) BULK SALES In Pennsylvania, a bulk sales transfer occurs when taxpayers transfer more than 51% of assets, including real property and classes of assets including real estate or machinery and equipment. All purchasers must secure bulk sale clearance certificates from sellers. This law applies to: All taxpayers subject to sales and use tax. All taxpayers subject to employer withholding tax. All corporations subject to any taxes administered and enforced by the Pennsylvania Department of Revenue. SUCCESSOR LIABILITY OR DE FACTO MERGER ANALYSIS Under Pennsylvania law, when one company sells or transfers all of its assets to another company, the purchasing or receiving company is not responsible for the debts and liabilities of the selling company simply because it acquired the seller s property. (See Cont l Ins. Co. v. Schneider, Inc., 873 A.2d 1286, 1291 (Pa. 2005).) A party can overcome this general rule if it can establish at least one of the following: The purchaser expressly or implicitly agreed to assume liability. The transaction amounted to a consolidation or merger. Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 6

7 The purchasing corporation was merely a continuation of the selling corporation. The transaction was fraudulently entered into to escape liability. The transfer s consideration was inadequate and did not make provisions for the selling corporation s creditors. (See Cont l Ins. Co., at 1291.) ANTI-TAKEOVER LAWS 7. Please describe any state anti-takeover laws. Do corporations have the ability to opt in or out of these laws? TRANSACTIONS WITH INTERESTED SHAREHOLDERS The Business Corporation Law of 1988 (BCL) has voting requirements for registered corporations when approving transactions with interested shareholders (shareholders who are parties to the transaction or who are treated differently from other shareholders). Registered corporations include: Pennsylvania corporations that have a class or series of shares entitled to vote generally in the election of directors of the corporation registered under the Securities Exchange Act of Pennsylvania corporations that are subject to the reporting requirements under Section 15(d) of the Securities Exchange Act of Certain registered management companies under the Investment Company Act of (15 Pa. Cons. Stat (2012).) Subject to exceptions, the BCL requires a majority of shareholders votes approval (excluding the interested shareholders votes) of a registered corporation for these transactions with the interested shareholder: A merger, consolidation, share exchange or asset sale between the registered corporation and a shareholder. A division where the interested shareholder receives a disproportionate amount of shares or other securities from any corporation resulting from the division. The voluntary dissolution and winding up of the corporation in which a shareholder is treated differently from other shareholders of the same class. Any reclassification in which the percentage of voting or economic share interest in the corporation of a shareholder is materially increased relative to substantially all other shareholders. (15 Pa. Cons. Stat (2012).) CONTROL TRANSACTIONS A control transaction is an acquisition by a person or group of the voting power over at least 20% of the voting shares of the corporation. Subject to exceptions, if a Pennsylvania registered corporation is subject to a control transaction: The controlling person or group must provide prompt notice of the transaction to the court and each shareholder of record holding voting shares. Any holder of voting shares may make a written demand on the controlling person or group for payment in cash for the fair value of each voting share as of the date on which the control transaction occurs. The fair value of the shares should be based on all relevant factors, including an increment representing a proportion of any value payable for acquisition of control of the corporation (15 Pa. Cons. Stat (2012)). The minimum value that a shareholder can receive is the highest price paid per share by the controlling person or group within the 90-day period ending on and including the date of the control transaction (15 Pa. Cons. Stat (2012)). If any shareholder believes the fair value of her shares is higher than the price offered by the controlling person or group, she may file a petition with the court seeking appraisal of the shares. The determination of any court-appointed appraiser is final and binding on both the controlling person or group and all shareholders who surrender their share certificates to the court seeking an appraisal (15 Pa. Cons. Stat (2012)). A registered corporation may opt out of these requirements by including a provision in its original articles of incorporation, or by amending its articles of incorporation before the date of the control transaction. Unless the proposed amendment has been approved by the corporation s board of directors, the affirmative vote of at least 80% of the outstanding shares is also needed (15 Pa. Cons. Stat (2012)). BUSINESS COMBINATIONS AND FAIR PRICE A registered corporation may not engage in any business combination (as defined in Section 2554 of the BCL) with an interested shareholder who either: Owns 20% or more of the corporation s voting stock. Is an affiliate or associate of the corporation who, at any time within the five year period immediately before the business combination, owned 20% or more of the corporation s voting stock. However, a registered corporation may engage in a business combination with interested shareholders when: The corporation s board of directors approved a business combination before the date of the interested shareholder s acquisition of shares. 7 Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.

8 Corporation Law: Pennsylvania The corporation s board of directors approved the purchase of shares by the interested shareholder before that date (15 Pa. Cons. Stat. 2555(1) (2012)). A business combination was approved by the affirmative vote of either: a majority of the shares able to be cast in an election of directors (excluding the interested shareholder s voting shares or their affiliates or associates ) at a meeting at least three months after the interested shareholder became (and at the meeting is) the owner of shares entitling him to cast at least 80% of the votes that all shareholders could cast in to elect directors; or all holders of all of the corporation s outstanding common shares (15 Pa. Cons. Stat. 2555(2) (2012)). The business combination must meet fair price conditions set out in Section 2556 of the BCL. Shareholders entitled to cast a majority of the votes able to be cast to elect the corporation s directors (excluding the interested shareholder s voting shares or their affiliates or associates ) voted to approve a business combination at a meeting at least five years after the date of the interested shareholder s acquisition of shares (15 Pa. Cons. Stat. 2555(3) (2012)). A business combination was approved at a shareholders meeting at least five years after the date of the interested shareholder s acquisition of shares, which meets the minimum conditions set out in Section 2556 of the BCL. A corporation may opt out of the above requirements by including a provision in the original articles of incorporation or by amending the articles of incorporation: According to the procedures applicable to the corporation. With the affirmative vote of the holders of a majority of outstanding voting shares (other than shares of interested shareholders) if the amendment will not be effective until 18 months after the shareholders vote and will not apply to any business combination of the corporation with an interested shareholder whose share acquisition date is on or before the effective date of the amendment. (15 Pa. Cons. Stat (2012).) CONTROL-SHARE ACQUISITIONS A control-share acquisition is an acquisition by any person of voting power that would (but for the restrictions in the BCL) entitle the person to cast a percentage of votes of: At least 20% but less than 33 1/3%. At least 33 1/3% but less than 50%. 50% or more. Under the BCL, subject to exceptions, shares acquired in the control share acquisition do not have any voting rights, unless a resolution approved by a vote of shareholders at an annual or special meeting of shareholders restores the voting rights of the control shares (15 Pa. Cons. Stat (2012)). The resolution may only be approved by the affirmative vote of the holders of a majority of the voting power entitled to vote in two separate votes as follows: All of the disinterested shares of the corporation. All voting shares of the corporation. (15 Pa. Cons. Stat. 2564(a) (2012).) These voting rights will be lost if the control-share acquisition is not completed within 90 days after the shareholder approval is obtained (15 Pa. Cons. Stat. 2564(b) (2012)). Unless prohibited by the terms of the articles of incorporation in effect before a control-share acquisition has occurred, the corporation may redeem all control shares from the acquiring person at the average of the high and low sales price of shares of the same class and series on a national securities exchange or otherwise on the date the corporation provides notice of the call for redemption at any time within 24 months after: The date on which the acquiring person consummates a control-share acquisition, if the acquiring person does not, within 30 days after consummation of the control-share acquisition, properly request that the issue of voting rights of the control shares be submitted to a shareholders vote under Section 2565 of the BCL. The issue of voting rights of the control shares is submitted to the shareholders and the voting rights are either not approved or are approved but lapse. (15 Pa. Cons. Stat (2012).) A corporation may opt out of these requirements by either: Including a provision in the original articles of incorporation. Amending the articles of incorporation before it is registered or within 90 days after it is registered. (15 Pa. Cons. Stat (2012).) DISGORGEMENT Subchapter H of the BCL protects registered corporations and legitimate interests of various groups from manipulative and coercive actions (15 Pa. Cons. Stat (2012)). Subject to exceptions, a corporation owns and can recover any profit realized by any person or group who is or was a controlling person or group (a person or group who has acquired, offered to acquire or disclosed the intent to acquire at least 20% of the voting power of the corporation, or who has otherwise publicly disclosed that it may seek to acquire control of a corporation by any means) from the disposition of any of the corporation s equity securities to any person or to another member of the controlling person or group where both: Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 8

9 The profit is realized from the disposition of the equity security within 18 months after the person or group gained controlling status. The controlling person or group acquired the equity security within 24 months before or 18 months after gaining controlling status (15 Pa. Cons. Stat (2012)). A corporation may opt out of these requirements by including a provision in the original articles of incorporation or by amending the articles of incorporation before it is a registered corporation or within 90 days after it becomes a registered corporation (15 Pa. Cons. Stat (2012)). SEVERANCE COMPENSATION AND CONTROL-SHARE ACQUISITIONS The BCL provides that any eligible employee whose employment is terminated (other than for willful misconduct) within 90 days before a control-share approval is entitled to receive a lump sum payment, if the termination was connected to an agreement, arrangement or understanding with the acquiring person or within 24 months after the control-share approval (see Control-share Acquisitions). The lump sum payment from the employer is equal to the difference between: The minimum severance amount for the employee. Any payments made to the employee by the employer due to termination of employment, whether under any contract, policy, plan or otherwise, but not including any final wage payments to the employee or payments to the employee under pension, savings, retirement or similar plans. (15 Pa. Cons. Stat (2012).) BUSINESS COMBINATIONS AND LABOR CONTRACTS The BCL provides that: No business combination transaction within five years of a control-share approval will result in the termination or impairment of the provisions of any covered labor contract. The contract will remain in effect until it is terminated according to any termination provision or until the parties to the contract or their successors agree otherwise. (15 Pa. Cons. Stat (2012).) A covered labor contract is any labor contract that: Covers persons employed in Pennsylvania. A labor organization, collective bargaining agent or other representative negotiated. Relates to a business operation that the registered corporation owned at the time of the control-share approval. Was in effect and covered the business operation and employees at the time of the control-share approval. OTHER CONSTITUENCIES The BCL also grants Pennsylvania corporations boards of directors wide latitude in considering the best interests of the corporation, to take into account: The effects of any action on groups affected by the action, including shareholders, employees, suppliers, customers and creditors of the corporation and on the communities in which offices or other establishments of the corporation are located. The short- and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation. The resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation. All other pertinent factors. (15 Pa. Cons. Stat. 1715(a) (2012).) In considering the best interests of the corporation or the effects of any action, the board of directors is not required to regard any corporate interest or the interests of any particular group affected as a dominant or controlling factor (15 Pa. Cons. Stat. 1715(b) (2012)) (see also Fiduciary Duties). Absent breach of fiduciary duty, lack of good faith or self-dealing, any act of the board of directors, a board committee or an individual director is presumed to be in the best interests of the corporation. In assessing whether the board of directors, a board committee or an individual director has discharged the applicable fiduciary duties, the court will not apply a higher burden of proof (15 Pa. Cons. Stat. 1715(d) (2012)). DISSOLVING A CORPORATION 8. What is required to dissolve a corporation in your jurisdiction? Please include information on: Documents. Board actions. Filing requirements (including timing, electronic vs. paper and availability of expedited/rush services). Shareholder actions. DOCUMENTS Generally, a corporation that wishes to dissolve must file articles of dissolution signed by an authorized officer of the corporation with Pennsylvania s Department of State s Corporation Bureau. The corporation must obtain and file clearance certificates from the Pennsylvania Department of Revenue and the Office of Employment Security of the Department of Labor and Industry, showing the payment of all taxes and charges due to Pennsylvania (15 Pa. Cons. Stat (2012)). The articles of dissolution must include: The name of the corporation and the address of its registered office, including street and number, if any. The statute under which the corporation was incorporated and the date of incorporation. 9 Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.

10 Corporation Law: Pennsylvania The corporation s directors and officers names and addresses, including street and number, if any. The manner the corporation adopted the proposal to dissolve voluntarily. A statement that the corporation has: discharged or adequately provided for the discharge of all liabilities; fairly and equitably applied all available assets to pay their liabilities, but has insufficient assets to discharge its liabilities; or elected to proceed under subchapter H (Post-dissolution Provision for Liabilities) of the Business Corporation Law of 1988 (BCL). A statement that the corporation has: distributed all remaining assets as provided in the BCL; or elected to proceed under subchapter H of the BCL and will distribute any remaining assets under subchapter H. If not proceeding under subchapter H of the BCL, a statement that: no actions or proceedings are pending against the corporation in any court; or the corporation has made adequate provision for the satisfaction of any judgments or decrees that may be obtained against it in pending actions or proceedings. If not proceeding under subchapter H of the BCL, a statement that notice of the winding up proceedings of the corporation was mailed by certified or registered mail to each known creditor and claimant and to each municipal corporation in which the corporation has a place of business in Pennsylvania. If a corporation has not begun business, the corporation must file articles of dissolution with the Pennsylvania Corporation Bureau stating so. The articles must be executed and acknowledged by a majority of the incorporators or a majority in interest of the shareholders. (15 Pa. Cons. Stat (2012).) BOARD ACTIONS The board of directors must adopt a resolution recommending that the corporation be dissolved voluntarily. The resolution must contain a statement that the dissolution will proceed under either: Section 1975 of the BCL (Predissolution provision for liabilities). Subchapter H of the BCL. The resolution may provide for the distribution to shareholders of any surplus remaining after providing for all liabilities of the corporation, including provisions for special treatment of shares held by shareholders. The board of directors must submit the resolution to a shareholders vote at a regular or special meeting (15 Pa. Cons. Stat (2012)). If a corporation has not issued shares or has not commenced business, a majority of the incorporators (or a majority of the shareholders) can agree to dissolve the corporation by filing articles of dissolution with the Pennsylvania Corporation Bureau (15 Pa. Cons. Stat (2012)). FILING REQUIREMENTS The articles of dissolution must be filed with the Pennsylvania Corporation Bureau, together with clearance certificates from the Pennsylvania Department of Revenue and the Office of Employment Security of the Department of Labor and Industry. The corporation must pay a $70 filing fee. Expedited filing services are available for an additional $70. SHAREHOLDER ACTION Adopting a board of directors resolution requires a majority of votes cast by all shareholders entitled to vote. If any class of shares is entitled to vote as a class, the resolution must be adopted by the affirmative vote of a majority of the votes cast in each class. A proposal for the voluntary dissolution of a corporation is not adopted by the corporation unless the board of directors has recommended it by resolution, even if the board has directed the submission of the proposal to the shareholders for action (15 Pa. Cons. Stat (2012).) Immediately after the shareholders approve the resolution, the corporation must officially publish notice of the winding up proceedings and mail the notice by certified or registered mail to each municipal corporation where it does business (15 Pa. Cons. Stat (2012)). ACTIVITIES REQUIRING SHAREHOLDER CONSENT 9. What activities require shareholder consent in your jurisdiction? A corporation generally can require shareholder approval for any corporate action by stating so in its articles of incorporation or by-laws. For fundamental corporate changes, the Business Corporation Law of 1988 (BCL) requires a corporation to obtain shareholder approval, subject to exceptions. Changes generally requiring shareholder approval include: Amendments to the articles of incorporation (15 Pa. Cons. Stat (2012)). A merger, share exchange or consolidation (15 Pa. Cons. Stat (2012)). The sale of all or substantially all of a corporation s property or assets, other than in the regular course of business (15 Pa. Cons. Stat (2012)). Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 10

11 Division of the corporation into two or more corporations (15 Pa. Cons. Stat (2012)). Dissolution of the corporation (15 Pa. Cons. Stat (2012)). For these changes, the BCL requires majority stockholder approval. In some cases, the articles of incorporation or by-laws may require approval by a greater percentage vote. PREEMPTIVE RIGHTS 10. Is there a statutory provision for preemptive rights? Do corporations have the ability to opt in or out of this provision? A shareholder does not have the preemptive right to subscribe to an additional issuance of stock, option rights or securities having conversion or option rights, or obligations of the corporation unless the articles of incorporation expressly grant it to the shareholder (15 Pa. Cons. Stat (2012)). LIMITATIONS ON CLASSES OR SERIES OF STOCK 11. Are there any limits on the classes or series of shares that can be issued in your jurisdiction? The Business Corporation Law of 1988 does not impose limits on the classes or series of capital stock that a corporation can issue. The articles of incorporation must include any limitations or restrictions on any classes or series of capital stock. LIMITATIONS ON DIVIDENDS 12. Please describe any limitations on the ability of a corporation to pay dividends on capital stock. Subject to restrictions in the by-laws, the board of directors may authorize, and the corporation may make, distributions on the shares of its capital stock (15 Pa. Cons. Stat. 1551(a) (2012)). However, no distribution may be made if, after giving effect to the distribution, either: The corporation would be unable to pay its debts as they become due in the usual course of business. The corporation s total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation provide otherwise) the amount that would be needed, if the corporation were to be dissolved at the time the distribution is measured, to satisfy the shareholders whose preferential rights are superior to those receiving the distribution (15 Pa. Cons. Stat. 1551(b) (2012)). A director may be held personally liable for supporting any improper distribution if it is established that the director breached her fiduciary duties under Section 1712 of the Business Corporation Law of The board of directors determine that a distribution is not prohibited based on one or more of the following: The book values of the assets and liabilities of the corporation, as reflected on its books and records. A valuation that takes into consideration unrealized appreciation and depreciation or other changes in value of the assets and liabilities of the corporation. The current value of the assets and liabilities of the corporation, either valued separately or valued in segments or as an entirety as a going concern. Any other method that is reasonable in the circumstances. The board of directors is not obligated to consider obligations and liabilities, unless they are required to be reflected on a balance sheet prepared on the basis of generally accepted accounting principles, or any other accounting practices and principles that the corporation generally uses in the maintenance of its books and records and that are reasonable in the circumstances (15 Pa. Cons. Stat. 1551(c) (2012)). A corporation typically does not need shareholder approval to make distributions. However, a corporation can require shareholder approval of proposed distributions by stating so in its by-laws. Practical Law Company provides practical legal know-how for law firms, law departments and law schools. Our online resources help lawyers practice efficiently, get up to speed quickly and spend more time on the work that matters most. This Article is just one example of the many resources Practical Law Company offers. Discover for yourself what the world s leading law firms and law departments use to enhance their practices. Contact Us Practical Law Company 747 Third Avenue, 36th Floor New York, NY plcinfo@practicallaw.com Copyright 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. Use of PLC websites and services is subject to the Terms of Use ( and Privacy Policy (